While global markets have staged a strong recovery since the pandemic lows in March 2020, global dividends are taking longer to recover. According to Janus Henderson, global pay-outs fell 12.2% in 2020, with one in eight companies cancelling its pay out altogether and one in five making a cut*.
The UK, Europe and Australia were at the forefront of the reductions, but the area I wanted to look at specifically is Asia and emerging markets – regions which were starting to blossom as a valid alternative for those scouring the globe for income prior to the pandemic.
Dividends returns from Asia Pacific fell almost 12% last year*, in line with the global average. Australia was the big contributor to this, with regulators preventing banking dividends being paid. By contrast, Hong Kong and China were among the most resilient globally – with both economies re-opening earlier following the pandemic, limiting damage to company operations. China accounts for 31%* of all emerging market dividends, explaining why dividends only fell 6% in 2020 for that specific asset class*
Three lost points
There are three points I want to make, which have got lost in the past 12 months or so. Firstly, growth in Asia is expected to account for 60% of GDP in 2030** – clearly a benefit for those looking for a growing income. Secondly – and perhaps most importantly – numerous attempts are being made by governments across Asia to improve the dividend culture. Korea introducing a penalty tax on excess capital holdings to promote higher dividends in 2014 and the Securities and Exchange Board of India making dividend policies mandatory for the top 500 listed companies in 2016, are two prime examples of this***.
The third is the most overlooked of all. Did you know that between 1987 and 2018 two-thirds of the long-run equity returns from Asia have historically come from dividends? I was surprised it was that high, but it shows the income story in Asia is nothing new, it has simply been shrouded by the market’s focus on share price appreciation****.
Jupiter Asian Income manager Jason Pidcock is positive about dividend payments for the coming year – citing the earnings upgrades already seen in the technology, financial and commodities sectors. He says he has been surprised by how many companies have beaten consensus expectations – a good barometer for the remainder of 2021 – where he feels many of the income stocks he looks at will see higher payouts when compared to 2020^.
However, he is wary of inflation pressure as lockdown eases globally. This is making him think hard about the pricing power of companies in the Asia Pacific region as even companies that can raise their own prices will have to cope with increased input costs^.
The importance of active also comes to mind in this environment. I recently read a note from the managers of the Guinness Asian Equity Income fund, which reflect the uncertainties of the region – such as the uneven vaccine rollout and the lack of clarity about how much life will return to normal in the next 12-24 months. As a result, managers Edmund Harriss and Mark Hammonds say they are targeting “value opportunities rather than seeking to position for a trend which could reverse sharply at any moment”, a move which is pushing them towards firms with superior pricing power and strong cash generation^^.
Magna Emerging Markets Dividend manager Ian Simmons says growth outperformed dividends by some 30% in 2020, adding that a return to some sort of normal will significantly boost the prospects for quality, growth compounding businesses in the region, which have been overlooked by the high value growth plays. He say his portfolio is currently trading at less than 15x earnings, despite having a mid-teens earnings growth forecast for the coming three years, adding the return on equity in the portfolio is above 20% with little leverage.
Shift to value
The last point I want to mention is the recent shift to value, and the potential opportunities this may bring to the region – and cyclical sectors within it – should continual central bank support and low interest rates be less influential on the direction of markets.
Asian income funds have had a difficult period on a relative basis, as the market has rewarded those faster growing companies, such as technology, which pay little or no dividends. However, the region is starting to slowly evolve and, as companies mature, they will start to get to a phase where they can return cash to shareholders more freely – meaning more choice.
*Source: Janus Henderson Global Dividend Index, edition 29
**Source: IMF – World Economic Outlook October 2019
***Source: JPM, Merrill Lynch
****Schroders – Rate cuts push case for Asian Dividends – August 2019
^Source: Jupiter: Notes from the Investment Floor – Taking the ‘high’ out of high yield – February 2021
^^Source: Guinness Asian Equity Income fund – Investment Commentary, April 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
This article was first published in the June 2021 issue of Professional Paraplanner.